Don Chamberlin's Financial Services Blog

Category: Retirement Planning

Financial security isn’t something that doesn’t just happen. You might get lucky, but it’s something that takes planning, commitment and money. Fewer than half of Americans have calculated how much they need to save for retirement. 30 percent of private industry workers in 2014 with access to a defined contribution plan didn’t take part. Yet it’s something you need to prepare for; the average American spends about 20 years in retirement, a fairly long time. I recently came across an article that shares 10 ways you can prepare for retirement, listed below:

Start saving: Start small if you have to, then try and increase how much you save each month. The sooner you start saving, the more time your money has to grow. Devise a saving plan, stick to it and set goals.

Know your retirement needs: Retirement is expensive; experts estimate that you’ll need at least 70 percent of your preretirement income to maintain your standard of living after you stop working. The key to a secure retirement is to plan ahead.

Contribute to your employer’s retirement savings plan: If your employee offers a retirement savings plan, sign up and contribute as much as you can. Over time, compound interest and tax deferrals make a big difference in how much you accumulate.

Learn about your employer’s pension plan: If your employer has a traditional pension plan, check to see if you’re covered by it and understand how it works. If you’re going to change jobs, find out what will happen to your pension benefit.

Consider basic investment principles: Inflation and the type of investments you make play an important role in retirement. Know how your savings or pension plan is invested; learn about your plan’s investment options and ask questions. Put your savings in different types of investments, which will help reduce risk and improve return.

Don’t touch your retirement savings: If you withdraw your retirement savings now, you’ll lose principal interest and could lose tax benefits or have to pay withdrawal penalties. If you change jobs, leave your savings invested in your current retirement plan or roll them over to an IRA or your new employer’s plan.

Ask your employer to start a plan: If your employer doesn’t offer a retirement plan, then suggest that it start one. There are a number of retirement saving plan options available that can help both you and your employer.

Put your money into an IRA: You can put up to $5,500 a year into an IRA, and can contribute even more after you turn 50. When you open an IRA, you have two options: a traditional or Roth. The tax treatment of your contributions and withdrawals will depend on which option you choose. IRAs can provide an easy way to save, and you can set one up so that an amount is automatically deducted from your checking or savings account and then deposited into the IRA.

Find out about Social Security benefits: Social Security pays benefits on average equal to about 40 percent of what you earned before retirement.

Ask questions: You can always know more. Talk to your employer, bank, union or financial adviser. Make sure you understand what they’re saying.

When planning for retirement, there are a lot factors to take into account like the age at which you want to retire, the income you require, and the future expenses you foresee. When you’re planning on retiring with a partner or spouse, your partners individual circumstances, health, goals, savings, and debt can all simplify or (more likely) complicate your retirement dreams. It’s important to sit down and make a plan together that will ensure both of you are able to retire in the best manner possible.

With so much to consider, it can be hard to know where to start. To get you started, here are four important aspects to discuss and find alignment on.

Individual Goals

It’s surprising how most people don’t really think about how they want to retire until it’s about to happen. But it’s crucial that you have these conversations before you retire, otherwise you might not be properly prepared to support the retirement you want.

Begin by asking both yourself and your partner these basic questions:

When do you want to retire? (Does one of you want to keep working longer than the other?)

Where do you want to live? (And what is the relative cost of rent/goods there?)

What kind of lifestyle do you want to have? (Do you want to go out to dinners, movies, and shows regularly or do you plan on spending most of your time doing activities around the house?)

How much do you want to travel (for both adventure and family purposes)? (Do you have relatives you know you will want to visit that are far away? Do you have a list of countries you’ve always wanted to visit once you had the time?)

What kind of hobbies or projects do you want to start? (How much time/money do you want to spend on gardening, refinishing the house, fitness classes, etc.)

How much do you expect to spend on other people (gifts for family, educational costs of children or grandchildren, medical expenses of unwell family members, etc)?

Getting a better picture of how you expect your average day, month, and year of retirement to be will make planning for the financial realities of it much simpler. It will also help you prioritize what’s most important and know where to cut if you end up having to make some sacrifices.

Account options

Once you figure out the “how much” you need to figure out the “where.”

Being a couple, you may end up with more and/or better options that if you had been planning for retirement alone. If you are thinking of your retirement days as a partnership, then you should be thinking of your retirement savings as a partnership, too. Examine all your options from every angle.

Does one of you have access to a 401(k) with matching dollars? You just found your top priority (for the both of you!) If you each have access to your own, you probably want to contribute as much as you can to fully take advantage of both.

Next, discuss your other account choices: do either of you already have a Traditional and/or Roth IRA? Should you start one? Depending on if you are married or not, you may choose to allocate your funds in one fashion or another.

Factoring in your age now and your expected date of retirement, you should be able to figure out where your combined savings efforts will get you the farthest by the time you want to begin withdrawing funds. You should also get a better idea of how much of your individual incomes you will need to contribute to these accounts each year until then.

Taxes

Taxes are extremely important when you are considering to save collectively! You both need an individual and collective strategy in place for when and where to access your funds. Ideally, you want your retirement resources to come from a variety of tax treatment, such as tax-deferred funds found in plans like IRAs and 401(k), tax-free funds in Roth accounts, and even already-taxed funds in brokerage accounts.

This mix of distributions will minimize your tax burden and allow you to hold onto more for retirement.

Beneficiary designations

Here’s an important fact many people either forget or simply neglect: the beneficiaries on your retirement accounts and life insurance trump your will.

This means that if you go through a divorce, re-marry, and forget to change your beneficiaries, you could end up leaving a big sum to your ex while neglecting to take care of your current loved one as well as you could have.

Keeping your designations up to date as your family evolves over time is important.

Planning for the good and bad

No one likes tragedy, but unfortunately some things we simply can’t control. While no couple likes thinking of a day where they could divorce or one of them could unexpectedly pass away, preparing for the worst will make dealing with these situations in reality a lot less awful.

Planning starts with a simple, though sometimes uncomfortable, conversation topic: money. As important as it is to understand both you and your partners financial situation, more people than you think avoid ever talking about money. In fact, an astounding 43% of couples can’t identify their spouse’s salary.

While we may worry that discussing how much our spouse makes is somehow “rude,” it’s actually the financially responsible thing to do. In case tragedy hits, you must be aware of your spouses financial details, account logins, and paperwork, or you could be left alone and untaken care of.

Final Thoughts

Remember, through all of this planning: you are a team. The end goal is to make sure that both of you are taken care of in the way you want to be. Proper planning, compromise, and a common goal are going to be important for your retirement in the same way they are for your relationship in general.

Although we live in an age where information is often readily available, we still require some expert guidance when it comes to certain topics. Personal finance, in this case preparing for retirement, is an example of one of those areas where it is hard to obtain the right, trustworthy information with ease. If you are thinking about retirement, whether it will be happening soon or many years down the line, you are most likely planning out those years around the idea of social security benefits.

If so, there are 4 myths that come up often when people discuss social security benefits that you should be aware of. Financial planner Don Chamberlin, as the CEO and Founder of The Chamberlin Group, has appeared on Fox 2 Now (KTVI) in St. Louis, MO to set the record straight:

1. 65 is the “Full Retirement Age”

As Don Chamberlin explains in the video below, the full retirement age (FRA) actually depends on the year in which the individual was born. In fact, you can start claiming at any time between 62 and 70. At 62 you can start claiming at a discounted rate but the longer that you put off claiming your benefits, the more money you will get. Don points out that many times, people miss out on thousands of dollars that they could have received in all had they just put off claiming for longer. As for the FRA, for those people retiring soon it is likely to be 66 but if you were born after 1960, it will be 67.

2. It is easy to decide your claiming strategy

It is important to decide on your claiming strategy but it is not exactly easy. The number of claiming strategies that are available to you depend on whether you are single or married, and that can make a huge difference. If you are single, you have 9 different strategies as options. However, if you are married you suddenly have 81 different claiming strategies. This is one of the many reasons why it is important to dedicate time to plan out your retirement. Choosing the worst strategy for yourself or for yourself and your spouse can mean losing out on tens of thousands of dollars down the line.

3. Those who claim Social Security benefits don’t have to pay taxes

Just because you are retired and claiming your Social Security benefits does not mean that you do not have to pay taxes. In fact, Social Security benefits can be taxed up to 85% – that can really put a dent in certain plans post retirement. When preparing to retire, you should evaluate your Social Security benefits with the goal of minimizing tax liabilities as you should do with any source of retirement income.

4. One can live comfortably on Social Security benefits

This claim goes against one of the very foundations of Social Security. Social Security, as Don Chamberlin explains, was not intended to replace a person’s income. In fact, when Social Security was founded the average life expectancy was 64 while Social Security benefits were taken at age 65. So in all, Social Security benefits were designed not to replace income but to supplement other sources of post retirement income. Now with our average life expectancy reaching close to 80 years, it is even more important for retirees who do wish to live comfortable to also have other sources of income post be it regular savings, retirement savings or investments.

Retirement is one of the most difficult things to plan, especially in this day and age. As our life expectancy continues to increase, so does the amount of years we spend in retirement. This means that it is important for your retirement savings to last long as well. More so, it is important that you have retirement savings in the first place.

Not having a plan for your retirement money: This seems relatively self-explanatory. Not planning for retirement is literally the worst thing you can do when it comes to retiring. How to avoid: Create a cash flow scenario says Herb White, a certified financial planner and president of Life Certain Wealth Strategies in Denver.

Forgetting about or ignoring inflation: One very common mistake is completely forgetting about or, even worse, ignoring the reality that is inflation. How to avoid: Make sure you take this into account so that you have enough money when you are ready for retirement. For starters, work with your financial expert to ensure that your investments are keeping up with the rate of inflation.

Not saving enough money: This is almost as bad as not planning for your retirement at all. Making sure you have enough money is key to being able to retire comfortably and happily. How to avoid: Although it may not seem like you can afford to save, you certainly cannot afford to not save. According to T. Michelle Jones, vice president of Bryn Mawr Trust, working towards eliminating small expenses, like eating out instead of at home, can help you free up cash to put into savings. It adds up over time.

Withdrawing from retirement accounts early: Pulling money out of your accounts before you even retire is a way to ensure that you have less money for when you really need it in the future. How to avoid: Don’t withdraw from your accounts. Don Chamberlin, the president and CEO of The Chamberlin Group in St. Louis, Missouri, says that taking loans and money from your 401(k) accounts and IRA is possible, but it is a mistake to do so. By keeping your money in those accounts, it will accumulate compound interests. Over time, this has the potential to add tens of thousands of dollars, or more, to your account over the course of your career.

Investing emotionally: Wealth management advisor Chuck Downs points out that we live in a culture of timing and selection. When investing in funds, people look at the recent performance and then panic when the market downturns. By buying high during these periods of hot performance and then panic-selling, they are letting emotions run their strategy. How to avoid: Patience. While that’s a lot easier said than done, having an expert by your side can help with being patient.

Being a conservative investor: This ties in with having your investments keep up with inflation. Currently, many investors are underperforming even when the market is performing well because of little exposure. How to avoid: Retired investors need higher growth in their funds to ensure that they can stretch their retirement money over what is expected to be a longer retirement period. This wasn’t the case many years ago.

Missing out on employer’s 401(k) match: Recently, a study by Financial Engines, an independent investment advisory firm, revealed that American workers miss out on $24 billion in matching funds for their 401(k)s yearly. How to avoid: Not making your own contribution to your 401(k) if your employer matches it is a big mistake, says Don Chamberlin. By not taking advantage of this, employees are essentially missing out on what equates to a free 50% return on the money they are already setting aside.

Letting all your retirement money be taxed: Putting all of your money into retirement accounts that do not ensure that at least some of your money is tax-free later in life is a mistake. How to avoid: Don Chamberlin of The Chamberlin Group points out that putting money in a Roth IRA or asking if a Roth 401(k) account is available through your employer is a great alternative. Money deposited into Roth accounts is taxable, but then it grows tax-free. If you already have all of your money in a traditional IRA, the Internal Revenue Service allows for those accounts to be converted to Roth IRAs.

Underestimating healthcare: Medical expenses can get large during retirement. Herb White of Life Certain Wealth Strategies explains that people overlook or underestimate future health care expenses. How to avoid: Properly planning for future medical expenses is important. This isn’t difficult and an expert can help you strategize on the best plan that will fit your needs and deliver the best benefits.

Filing for Social Security too early: Once you retire, it may appear tempting to begin filing for your Social Security benefits at the age of 62, when you are allowed to do so. But you will be receiving a lower amount. How to avoid: Plan out your retirement and wait to file for your Social Security benefits by the full retirement age. If you are retiring this year, that will be 66 years of age. By this age, you will receive a higher amount than if you did it by 62. T. Michelle Jones of Bryn Mawr Trust points out that those who wait up to four years to file for benefits can 132 percent of their monthly benefit.